South African investment managers are the most bullish on the country’s bonds since 1999 as fears of a recession fade and interest rates are set to peak, according to a survey conducted by Bank of America (BofA).
Bonds have become preferred over equity and cash, John Morris, a South African strategist at the bank, said in a note to clients, citing the survey conducted between 7 and 13 July based on the views of 14 fund managers.
“A remarkable 64% of fund managers believe that bonds are undervalued, and an equally impressive 64% see buying opportunities in equities. The market is abuzz with excitement as the All Share Index reached 84 000 last month, with total returns of 13% for equities and 15% for R2032 bonds,” BofA said.
The results of the survey were published just hours before the South African Reserve Bank (Sarb) paused its longest phase of monetary tightening since 2006 and left the repo rate unchanged at 8.25% and the prime lending rate at 11.75%.
The decision by the Sarb’s Monetary Policy Committee was not unanimous, with two of the committee’s five members voting for a hike of 25 basis points.
The outcome was in line with the consensus forecast of 21 economists surveyed by Reuters: 12 predicted no change, while the remainder called a 25bps hike.
Sarb governor Lesetja Kganyago said the decision not to increase the repo rate did not necessarily signal the end of the hiking cycle, emphasising that economic data – inflation data in particular – would guide future decisions.
Rand-denominated bonds performed poorly in the first half of the year and have handed investors losses of 2.2% in dollar terms in the year to date.
The sell-off was driven by worsening power outages, a weaker rand, international tensions over South Africa’s stance towards Russia, and a deteriorating fiscal outlook.
Bonds have rebounded in the past two months, providing a total return of 17% since the end of May. The rally has been aided by the rand strengthening from record lows and lower inflation.
The BofA survey found that net bond bulls among local portfolio managers rose to 57%, while net equity bulls were steady at 21%. In addition, a net 43% of managers were commodity bears, and it found no commodity bulls.
About 72% of fund managers surveyed regarded equities as undervalued.
The portfolio managers surveyed predicted that over the next 12 months, investors would likely favour the banking, health care, and tobacco sectors. The gold, real estate, and beverage sectors were expected to witness a comparatively weaker performance.
A net of 50% of local portfolio managers want to be overweight in domestic stocks in the next year. A net of 21% of the portfolio managers surveyed were overweight in bonds, and a net of 21% were underweight in equities.
The survey found that 57% of portfolio managers were underweight in offshore assets.
Positive outlook for the economy
BofA found that recession fears among South African portfolio managers have faded, and the outlook for the economy has turned positive. A net 21% of respondents expect the economy to strengthen in the next 12 months, the highest reading in 15 months, compared to a net 39% in June who expected it to get weaker.
Overall, 50% of respondents said they expect the economy to get a little stronger in the next 12 months, up from 28% in June, while 21% expect it to stay the same (June: 6%).
The number of respondents who said the economy would get a little weaker decreased from 50% in June to 21% in July, while the number of respondents who expected it to get a lot weaker dropped from 17% to 7%.
The Sarb expects the economy to grow by 0.4% this year, a slight revision from its May forecast of 0.3%.
Inflation expected to decline
The number of respondents who expect inflation to decline in the next 12 months grew, going from a net -89% in June to a net -93% in July.
The number of respondents who expect inflation to be a lot lower in the next 12 months increased from 17% in June to 36% in July.
No respondents in the July survey said they expect inflation to increase in the next 12 months, and only 7% expect it to remain unchanged, down from 11% in June.
According to Statistics SA, inflation, as measured by the Consumer Price Index, dropped from 6.3% in May to 5.4% in June, which is within the Sarb’s target range of 3% to 6%.
The last time inflation was below 6% was in April 2022. The rate in June is the lowest reading in 20 months (since October 2021) when the inflation rate was 5%.
On Thursday, the Sarb downgraded its forecast for headline inflation in 2023, from 6.2% to 6%, while lowering its food inflation forecast from 10.8% to 10.3%.
Eskom and Transnet are the biggest risks
Local managers are concerned about the potential risks related to state-owned enterprises (SOEs) and weak earnings per share.
They also believe the government is reforming the economy and country at a “snail’s pace”. The key issues include poor skills, wage rigidity, government intervention in the economy, and delivery failures by SOEs.
The fund managers believe Eskom and Transnet are the biggest risk to the economy.
“These factors have caught managers’ attention, prompting a more cautious approach,” the report said.
The BofA survey found that corporate interest in renewable energy is soaring, with projections suggesting the addition of about five gigawatts in renewables by 2025.
Fears among portfolio managers of a grid collapse were at their lowest this year.
“A clear majority of investment managers describe the potential for grid failure as low or very low. No managers in the July survey felt the risk of grid failure is high or very high,” the report said.
